GIC Re IPO: Third Largest Offer Opens Today, Should you Invest?

IPO’s have become a hotbed of investment.  Today, the majority of the retail investors are participating in the equity market through the IPO mode. The average retail subscription has surged up to 11 times of the allocated quota. In the current fiscal year, already 19 IPOs have been launched in the market and 13 of them have been over-subscribed, which shows the renewed interest of the investors in the primary market. Amidst this renewed excitement GIC has come up with the third largest IPO.

IPO’s that have hit the bourses

In the current fiscal, several IPO’s have hit the bourses including HUDCO, Security Intelligence Services, Godrej Agrovet, Matrimony.com, Reliance General Insurance, Indian Energy Exchange and now here comes the launch of the third biggest IPO-General Insurance Corp. The company is all set to squeeze Rs 11,370 crore from the public with its initial public offer that kicks off today.

It is said, “Never test the water with both feet.” So, before plunging ahead with the investment, here are a few factors that you need to take into account.

What GIC deals in?

General Insurance Corporation of India is a reinsurance company that offers reinsurance cover  (insurance purchases from other insurance companies to mitigate the risk) for non-life and covers half of the life insurance company in India.

Why there is a positive sentiment in the air?

Globally looking out, the reinsurance market is on an upswing, thanks to the natural catastrophe and the government irregularities.  To make the matters worse, Swiss reinsurer has put India at no 2 position in the worst catastrophe list due to a string of incidents that happened in Kerala Temple and the recent stampede in Elphinstone station, Mumbai that killed 23 people. With all these statistics in mind, we believe the reinsurance market will grow at a rapid rate.

Having a monopoly in the re-insurance market, gives GIC an over price advantage. Here’s a look at the financial details of the company.

How much capital will be infused?

GIC has said that it will sell 12,47,00,000 shares at a price band of Rs 855-912 in an IPO that will end on October 13. This offer would include 14.22 percent of the post offer paid up equity share capital. The company will offer a discount of Rs 45 per share to the eligible retail investors. The investors can bid for a lot of 16 shares and multiples thereafter. The company intends to infuse certain amount as fresh capital and rest it will sell as a stake to the government.

Financial Details-a sneak peek

The gross written premium of GIC has grown steadily at CAGR of 32% for the year 2015 and 2017.  The company has attained the premium target of Rs 33,741 crore, which is 82 percent more than the previous year. The growth chances are a very high this year too. The statistics reveal that 29 percent of GIC revenue comes from agriculture segment and 20 from the motor segment, 12 percent from life insurance companies.

Since the market of a non-life insurance company is expected to grow by 15-20%, it is believed that the investment in the company is secured. Profit after tax has been recorded as 4.23 percent annually during the period, the productivity measured by PAT per employee has improved by 5.57 crore.

Red Flag

Though on the face, the company seems to be high on profit margins, but the decreasing operating ratio is a red flag. The operating ratio is the profit earned after underwriting risk plus investment as a percentage of net- premium. This has reduced down since the last fiscal year. Also, there are no competitive peers to determine the reasonability of the valuation, so investors will be investing at their own risk.

What the analysts have to say?

Recent IPOs of insurance companies like SBI Life and ICICI prudential did not give much listing and short term gains for investors therefore, the analysts conclude that:

“The stock must be held with ultra- long term perspective for superior returns,”

Conclusion

Thanks to the buoyancy in the primary market and ease of SEBI restrictions, the grey market has turned lucrative and it is believed that GIC IPO will translate into a profitable investment.